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In a world where the US dollar dominates, China must strike back by enhancing the yuan’s international appeal
- Washington has the dollar and powerful legislation at its disposal, and can make life difficult for countries just by denying them access to the US financial system
- Beijing needs to step up the pace of RMB internationalisation, to mitigate the risks to the Chinese economy
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Although China has the second-largest economy in the world, its currency still lacks heft in the global marketplace. This leaves China vulnerable because the United States could easily limit Chinese access to the US financial system, if it wished. Such access remains crucial in a world where the US dollar is the dominant currency for global payments.
Beijing needs to step up the pace of yuan internationalisation if it is to start to address that vulnerability.
US Vice-President Mike Pence reiterated last week that Washington is “not seeking to contain China’s development” but he also repeated the message of President Donald Trump’s national security strategy, that “the United States now recognises China as a strategic and economic rival”.
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In truth, the White House could easily utilise existing US legislation to restrict Chinese access to the US financial system. And the more reliant the Chinese economy is on the US dollar, the more vulnerable China is to such legislative measures.
Encouraging greater international use of the yuan would help mitigate, though not eliminate, such risks, but that is proving to be a slow process.
The renminbi is now “the fifth most active currency for global payments by value”, according to the Belgium-based financial messaging system Swift (the Society for Worldwide Interbank Financial Telecommunication). That might not sound too bad but the devil is in the details.
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